格南登福 (IR) 2019 Q1 法說會逐字稿

Good day, and welcome to the Gardner Denver First Quarter 2019 Earnings Conference Call.

(Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Vik Kini, Investor Relations leader.

Please go ahead.

Thank you, and welcome to the Gardner Denver 2019 First Quarter Earnings Call.

I am Vik Kini, Gardner Denver's Investor Relations leader.

And with me today are Vicente Reynal, Chief Executive Officer; and Niel Snyder, Chief Financial Officer.

Our earnings release, which was issued this morning, and a supplemental presentation, which we reference during the call are both available on the Investor Relations section of our website, gardnerdenver.com.

In addition, a replay of this morning conference call will be available later today.

The replay number as well as access code can be found on Slide 2 of the presentation.

Before we get started, I would like to remind everyone that certain of the statements on this call are forward looking in nature and are subject to the risks and uncertainties discussed in our previous SEC filings, which you should read in conjunction with the information provided on this call.

Our full disclosure regarding forward-looking statements is included on Slide 3 of the presentation.

Turning to Slide 4. On today's call, we will review our first quarter highlights as well as our segment results and 2019 guidance.

We'll conclude today's call with the Q&A session.

(Operator Instructions)

At this time, I will now turn it over to Vicente Reynal, Chief Executive Officer.

Thank you, Vik, and good morning to everyone.

Starting with Slide 5, I would like to start with a brief overview of the first quarter.

Overall, first quarter was a balanced quarter with strong execution across our commercial and operational initiatives.

We delivered revenue and adjusted EBITDA that were in line with our expectations and continued to show solid momentum on cash generation.

Due to our performance in the first quarter, we are reaffirming guidance for the total year.

Let me provide a little bit more color on the financial highlights in the first quarter.

Starting first with orders.

We saw an order decline of 9%, excluding FX, which was heavily impacted by the non-dynamics in upstream energy of minimum new pump orders for new frack fleets.

These drove nearly $16 million of expected orders decline, and when excluding upstream energy, the rest of the portfolio grew 3% excluding FX, as the broader markets continue to remain quite resilient.

Revenue grew 4%, excluding FX with solid mid-single-digit growth in the industrial segment and double-digit growth in our Midstream, Downstream and Medical businesses.

This comes on top of very strong growth of 22% in the prior year as the teams continue to deliver above-market growth through the utilization and execution of our Gardner Denver Execution Excellence tool or GDX.

While we did see the expected pressure on upstream energy revenues that we indicated during our last call, I'm particularly pleased with the resilient performance across the balance of the portfolio.

As our GDP exposed businesses of Industrials, Medical and mid- and downstream grew 12%, excluding FX.

Adjusted EBITDA declined 5% to $140 million, or down 2%, excluding FX.

And margins declined 130 basis points to 22.6%.

The results were in line with our expectations, and the declines in both adjusted EBITDA and margin were largely attributable to the decrease in upstream energy revenues as well as higher corporate cost due to prior year legal expense recoveries that did not repeat in the current year.

Despite these factors and other non-headwinds, like FX and tariffs, the team executed extremely well, including three full digit basis point margin expansion in the Industrials and Medical segments as targeted cost initiatives like Innovate 2 Value or I2V, are showing positive impacts.

I'm very pleased with the continued momentum we see on cash generation, which speaks to our disciplined cash and working capital management.

Free cash flow in the quarter was $55 million, up 9% over prior year.

In addition, net operating working capital, as a percentage of sales, continue their positive trend we have seen over the past few quarters at 24.9%, which is a 430 basis points improvement versus last year.

The solid cash and adjusted EBITDA performance lead to net leverage of 2.0x.

In addition, we made a $27 million debt repayment within the quarter as we continue to focus on prudent debt reduction and managing our growth leverage levels.

As we have stated previously, we will continue to remain disciplined on capital allocation and balance debt paydown as well as opportunistic share repurchases within M&A opportunities.

Turning to Slide 6, our commitment to our 4 pillars of strategy remains unchanged, and driven by the tools and processes of GDX.

I hope everyone had a chance to attend or watch our recent Investor Day that we hosted in mid-March, as it really speaks to the passion that the entire team has around deploying our strategy across every aspect of the business and driving ongoing profitable growth.

Moving to Slide 7, I'll provide more color on the operating performance of our segments.

I will start with Industrial segment, where we continue to see good momentum on both commercial and operational initiatives.

The Industrial segment's first quarter order intake was up 4%, excluding FX at $335 million.

Revenues in the quarter were $318 million, up 6%, excluding FX.

This resulted in a book-to-bill of 1.05, which is a good sign as we enter the year that core markets remain relatively healthy.

In terms of the product lines, we continue to see relatively stable performance in core oil lubricated compressors, which were up low single digits.

We highlighted in the past the unique composition of our portfolio around a well-balanced portfolio with niche applications, and this allows to show continued resiliency even in more difficult market conditions.

One such product is highlighted on the bottom of the slide, which is over LeROI compressor.

LeROI business was purchased into the portfolio in mid-2017, and introduced a line of gas compressors to complement our portfolio of air compression technology.

When coupled with our existing Gardner Denver distribution channel in the Americas, we're now seeing strong growth in niche industry of biogas where we have seen solid double-digit growth.

In addition, we continue to see solid demand for our niche products in Europe and Asia, in end markets like food, pharma, transportation and Marine.

From a regional perspective, the Americas continued to be the strongest region with high single-digit growth on both revenue and orders in the quarter.

Europe continues to be relatively stable with low single-digit revenue and orders growth, excluding FX.

Despite some of the macro concerns surrounding Europe that have persisted through the quarter, we saw a good balance of high single-digit to double-digit growth in many niche products with generally flattish growth in oil lubricated compressors as solid demand in Germany offset some of the slowdown from areas like Italy and France.

In Asia Pacific, we saw slight growth in China, largely driven by niche products like blowers, vacuums and high pressure compressors.

The growth is very encouraging and we continue to monitor the market closely, given ongoing noise around trade tension and tariffs.

Moving to adjusted EBITDA, Industrials delivered $71 million in the quarter, up 12%, excluding FX.

First quarter adjusted EBITDA margin was 22.3%, up 120 basis points versus prior year.

The year-over-year margin increase was achieved despite ongoing headwinds from FX and tariffs, and this speaks to the benefits we're seeing from initiatives like pricing, after market growth and I2V.

Moving now next to the Energy segments on Slide 8. Overall, the Energy segment performed in line with expectations, given the non-declining industrial revenues, partially offset by solid execution in the mid- and downstream businesses.

The Energy segment first quarter order intake was $208 million, down 26%, excluding FX driven largely by the previously mentioned $60 million in pumps from the upstream business that did not repeat again this year.

Orders in the mid- and downstream business were much more stable and up low single digits, excluding FX, which is in line with our expectations.

Revenues in the quarter were $233 million, down 1%, excluding FX.

With upstream revenues down 16%, excluding FX, offset by growth in both the mid- and downstream businesses, which both showed strong double-digit increases.

So driving now into the components of energy, let me start first with the upstreams.

Orders were down 41% and revenue was down 16%, both excluding FX with expected original equipment declines as the primary driver.

As you recall from our last earnings call and our recent Investor Day, we indicated our Q1 was going to be a low point in the year with sequential increases progressing through the year.

We still see that as the progression for the year with an air pocket in the first half of the year.

As many of you know, over the past few years, we have built a resilient business where more than 75% of our revenue is reoccurring aftermarket, and specifically consumables continue to trend very well.

Consumables are the closest point to activity and were up 17% in terms of revenue in the quarter.

In particular, our 2 new consumable offerings of packing and plungers continue to see solid market penetration with strong double-digit growth.

In terms of the market, in general, we continue to believe that 2019 will be a transitional year as the market waits for the commissioning of new pipelines and gradual sequential improvement, particularly in the second half of the year.

The DUCs, which is drilled but uncompleted well count, continues to remain healthy, at approximately 8,500 wells as of the end of March, which bodes well for future activity levels.

Although the market is in a bit of a transitional period, I'm very encouraged by the steps in innovation and partnering with our customer base that our team continues to make, the picture at the bottom of the page shows an electric powered frac truck with 2 Gardner Denver Thunder pumps packaged together.

Electric frac is a concept that has gotten a lot of attention and discussion as of late as an alternative to conventional diesel powered frac fleets.

And I'm very pleased that Gardner Denver has been on the forefront here partnering with several leading pressure pumpers and equipment providers who are utilizing electric powered frac fleets.

This truck packages 2 of our leading Thunder Pumps, which allows for up to 6,000 of hydraulic horsepower with increased levels of efficiency.

Innovations like this and strong partnership with leading providers of frac services will continue to drive profitable growth as we look ahead.

In the mid- and downstream side, revenue was collectively up 31% and orders were up low single digits both excluding FX.

We did have 2 larger project shipments in the midstream business with collective revenue of approximately $10 million, which drove book-to-bill for the combined mid- and downstream businesses to approximately 1. However, this downstream business on its own had a book-to-bill of 1.16, as it is typical for the beginning of the year, as we build backlog for the second half of the year.

Overall, the market continues to trend well as the project funnel remains quite healthy, and we continue to see increasing demand for both Industrial like process equipment as well as projects tailored towards environmental applications and regulatory emissions.

The Energy segment delivered adjusted EBITDA of $60 million in the first quarter, which was down 10% to prior year, excluding FX.

As a percentage of revenue, first quarter adjusted EBITDA was 25.7%, down 240 basis points from prior year, due to the previously mentioned decline in upstream revenue as well as revenue mix due to lower margins on the 2 large midstream projects.

These declines were partially offset by volume growth from the downstream business as well as targeted cost actions and operational efficiency initiatives.

While energy margins were down overall, I continue to be pleased with the measures the upstream energy team is taking, as adjusted EBITDA margin remained well above total energy margin profile and in excess of 30%.

Moving next to the Medical segment on Slide 9. Order intake was solid at $71 million, which was down 1%, excluding FX.

And it's worth noting that this is on top of 11% growth that we saw in the prior year.

As we have mentioned previously, many quarters throughout 2018 benefit -- benefited from large design wins, which we did not expect to repeat to the same degree each and every quarter.

However, first quarter orders did remain very healthy and in excess of $70 million, which was up 8% from the fourth quarter of 2018.

Revenues in the quarter were $69 million, up 19%, excluding FX.

This marked the fourth consecutive quarter of double-digit organic growth as the business continues to execute well on innovation and product design wins.

In addition, this puts book-to-bill at 1.03, with Q1 ending backlog nearly 9% higher than prior year.

One such win on the gas pump side of the business is a high-pressure gas pump that was recently specified on a leading clinical molecular diagnostic solution.

The Gardner Denver solutions provided more efficient flow rate in different altitude environments, which was a critical differentiator for the end customer.

Wins like this in high growth end markets, like lab and life sciences continued to show the growth opportunity across our gas, liquid and liquid handling product lines.

Medical adjusted EBITDA performance for the quarter was $20 million, up 32%, excluding FX.

Margins were 28.9%, up 260 basis points versus prior year and can be attributed to strong flow-through from the volume increases, continued operational efficiencies in the plant and prudent cost control across the business.

Moving to Slide 10 now, as I indicated earlier in the call, due to the strong and in line performance in the first quarter, we are reaffirming guidance for the year.

As a reminder, this implies mid-single-digit revenue growth before the impact of FX in our industrials, mid- and downstream energy and Medical businesses as well as high single digit to low-double digit declines in our upstream business with more pronounced softness in the first half of the year.

For total company, and inclusive of FX impact, we're expecting low single-digit growth on a total year basis, and an adjusted EBITDA range of $680 million to $710 million.

Now turning to Slide 11, the rest of the key metrics for guidance remain unchanged, including CapEx, tax rate and year-end debt leverage.

In addition, we continue to expect to generate in excess of $400 million of free cash flow for the year, and approximately 100% free cash flow to adjusted net income conversion.

Overall, we're pleased with the start of the year.

And despite many of the macro headwinds that persist, we continue to execute well, both commercially and operationally.

We remain confident in our ability to execute on a strategic initiative and deliver our financial commitments across each of our segments.

With that, we will turn the call back over to the operator and open it for Q&A.

(Operator Instructions) Our first question comes from Michael Halloran of Baird.

So first just on the trend through the quarter and the thought process from here from 2 prospectives, first on the upstream side.

Maybe you can give some thoughts on the cadence as you saw demand materialize through the quarter?

Obviously orders were soft against a really tough comp that was highlighted coming in.

Do you see any different trajectory than you articulated a couple of months back, if you look to 2Q, 3Q, based on the order book today, the demand outlook, what clients are saying, customers are saying, anything like that?

Mike, no, I think, we still see consistency to what we said even at the Investor Day that the second half will be up sequentially to the first half but that we will see that as kind of that at least, at this point of time, we still wanted to be more prudent and call it out as low to mid-single-digits, sequential improvement, second half versus the first half.

And no real change on the cadence through the first half of the year either, Vicente?

No, no real cadence to the first -- no, that's right.

Yes, so we still believe that as we said also before, Q1 will be the most pronounced bottom and then slight improvement, and then as we go into the second half, better than the first half.

And can you give that same sort of thought process and commentary on the industrial side of the business, particularly with a focus on what you're seeing in your European businesses and in China?

Yes.

The second quarter should be comparable to the first quarter, Mike.

And I think it's just going to follow the same trends that we typically see in terms of seasonality within industrials.

I mean, I think, maybe the only one point to call out is that within Q1 in the quarter, China, we saw really strong exit of the quarter in terms of orders.

So maybe kind of things are getting unlocked in China.

So we were watching that carefully to make sure that, that level of consistency continues to happen in the second quarter.

And when you say stable 1Q to 2Q, were you talking dollar numbers or were you talking percentage change?

Dollar numbers.

No -- sorry, percentage changes.

Our next question comes from Joe Ritchie of Goldman Sachs.

Congrats again as well.

So Vicente, can we just maybe just elaborate a little bit more on just the upstream business for a second?

So clearly, you had a really order comp in 1Q.

Just what are you hearing from customers right now in terms of like frac fleet stacking and the demand for OE versus aftermarket?

Yes, Joe.

So overall, what we're hearing in the market continues to be similar to what we said a few months ago at the Investor Day, which is that everyone expects a much stronger second half and particularly fourth quarter as the constraints on the pipeline capacity seem to be kind of freeing up in the second half with more pronounced on the fourth quarter.

So that's kind of from a customer perspective what we're seeing, what we are hearing, and it seems to be more consistent as we move every day and every week through the quarter.

Obviously, we're going to be at the OTC in a week or so, so we'll hear more commentary from others there as well, but at least it's been consistent so far.

In terms of OE and aftermarket, OE, still muted from a new fleet expansion, so we still don't see that -- there's going to be any OE pumps that will come for new fleet expansions.

We're definitely seeing kind of quite momentum on the OE replacement pumps.

And there's been quite a couple of articles talking about that due to the level of intensity and the hours that the pumps are working that there should be a good cycle coming through on the OE replacement pump.

Okay.

That's helpful.

And then I guess, my follow-on question is just maybe just talking about industrial margins, another really solid expansion quarter on a year-over-year basis.

Maybe just talk a little bit about your key drivers, what does pricing look like?

How much of this was I2V?

Just trying to understand what really drove the strength just given we've seen more mixed performance, I guess, from some of the other industrial peers out there?

Yes.

We saw a good momentum on pricing.

I would say pricing anywhere between 1 to 2 points.

The blend of aftermarket continues to improve, so aftermarket delivered even better growth than the overall total number, so that obviously creates a better mix change.

I2V continues to be a good start, but keep in mind that this is really more offsetting some of the tariffs if you want to put it from that perspective that we get above $1 million to $2 million in the quarter.

So again, I think, the work of I2V and sourcing activities offsets the tariffs, while price and aftermarket mix helps the margin profile.

Our next question comes from Julian Mitchell of Barclays.

No need, I guess, for capital deployment question.

So maybe just on the Energy segment.

The decremental margins, I guess, pretty severe in Q1.

You call out a couple of factors around project shipments in midstream and so forth.

But just wondered when you're looking at that decremental drops there in Q1, do we see a much better performance into Q2?

Or you think Q2 is down heavily, again, and then we get the big incrementals on the way back up in the second half?

Yes, Julian.

We see the decremental in the energy again driven because of upstream revenues coming down while we saw the large couple of projects on midstream side of the business, typically coming, I mean, well below the margin profile of the Energy segment.

I think the good point to note here, Julian as well is that upstream event though we saw this decrease in revenue as expected, our margin profile for upstream is still -- it was above 30% EBITDA margin.

So pretty strong ability to even in a declined quarter, we still deliver above 30% EBITDA margin, which, I think, is fantastic for what the team has been able to achieve there.

And I think for going as you said, moving forward, obviously, we don't expect these 2 large midstream orders to come through in the first quarter, so that should help as we move forward.

And then my second question, really, I guess, across the business, some shorter cycle companies have complained about destocking in recent months in various regions and vertical markets.

Just wondered if you had seen any of that take place across any of your OEM or channel partners in different segments?

And how satisfied or relaxed you are today about the status of inventories when you look out across different markets?

Yes, Julian.

We didn't see that has been a concern to us.

At least, we didn't see that going in the quarter.

I mean, I can tell you that from an industrial perspective we have -- most of the dealer channel is in the U.S. And we have actually access to see what their inventory levels, and we always maintain and ensure that it doesn't spike up or becomes unhealthy higher amounts.

So what we saw, no destocking, because we just don't allow -- it's one of our rules, we just don't want dealers to stock.

And then in the other regions, whether Asia Pacific and Europe for industrial perspective, the amount of dealers, percentage of revenue is much smaller.

And I don't think that any of this destocking was definitely an issue for us.

Our next question comes from Nathan Jones of Stifel.

Just a follow-up question on Industrial, Europe.

One of the comments you made Vicente was that you serve very strong environment in Germany, which I thought was a little surprising given some of the macro data -- the that Industrial data that's coming out of Germany.

Maybe you can put a final point on that.

Is it Germany is good for you, because you're gaining market share or you're actually seeing underlying market strength?

And how you see that particular market progressing for the rest of the year?

Yes, Nathan.

I think we kind of allude it to -- if you remember, our kind of niche products momentum or the blowers vacuums for specific end markets could be transportation with water, food, pharma, where we are seeing some good momentum with the solutions that we're driving.

I would say that, that is the main driver of the growth that we're seeing in Europe as well as the growth that we saw in Germany.

And when we look at the kind of more related to the Industrial -- general industrial application, maybe the core compressor that we saw as I kind of stated maybe kind of flattish or may be some more softness on that offset by the more nicher products.

Okay.

That helps.

And then one on upstream energy that's not frac pumps.

For the last, I don't know, 6 to 12 months, maybe we've been talking about the potential for a drill pump cycle here at some point.

Any update you could give us on the conversations you're having with customers on that front?

Yes.

I think -- you know what -- conversations continue, I will say.

I don't think that we have -- I wouldn't call that as -- it is -- we are not seeing the purchase orders yet obviously, but conversations continue.

And the other good data point that we look is that super spec rigs continue to be at very high utilization.

So one of our customers is seeing 95%, kind of close to 97% utilization of super spec.

So the trend that we see is that more super spec rigs are needed and as you know, that requires 3 or 4 pumps and there is just not many more pumps to get cannibalized from older generation rigs to be super spec rig.

So the trend and kind of the secular trend that we see, we still see it.

And we still have kind of high hopes that it will continue to -- and then at some point of time unlock this request for drill pumps.

But having said that, we -- it is not in our guidance.

So just to emphasize, we never guided that we will see these drill pump cycles.

And obviously, if it comes, we're going to be ready, and it should be upside for us.

(Operator Instructions) Our next question comes from Joshua Pokrzywinski of Morgan Stanley.

So -- I guess, just given there's some macro volatility out there and may be in the industrial segment you didn't see too much of.

Can you just give us a sense for kind of entry rates for the business as you got into the quarter versus exit rates, that things get better or worse?

Just some kind of indication on where the trendlines should be drawn from here?

Yes, Josh.

We saw -- maybe I'll start with just kind of the -- maybe the smaller -- smaller of all of our regions, but the Asia Pacific and particularly China, we saw good momentum as we exited the quarter.

And at least after -- obviously, quite a few quarters of pretty constrained demand in China, we think that things are kind of unlocking there, and it is not just compressors, I mean, it is basically blowers for waste water treatment applications, and another kind of large-scale projects.

So hopefully that continues and that was just kind of like one data point in the month of March.

I would say for respectively to the other businesses, most of them kind of had, I think consistent to what may be others saw, things were very slow in January, but merely due to seasonality, I don't think I will call it for anything negatively general in the market conditions.

And then obviously that you could argue that because of the slow start in January, we saw progression, but I will call that more seasonality, that will be for America and Europe.

And I think the good thing is that Europe continues to be fairly stable for us.

I mean the team in Europe is doing a fantastic job over country in the effect of the entire macro slowdown.

Got it.

That's helpful.

And then just one requisite question on upstream energy.

Just thinking about kind of the absolute dollar number of orders, I think, kind of in the low-200s here.

How should we think about that absolute number trending through the year?

Does -- do we start to grow here sequentially?

And how do you think about price -- the cadence on price as we move through the year?

I know there is lot of sensitivity in you guys maybe versus some others out there, but anything you're seeing or any kind of directional moves you expect?

Josh, you're referring particularly to the upstream side of the business, right?

Yes, I guess, the 200 comment, it would be orders entirely in Energy -- upstream orders, I don't know specifically, but...

Exactly.

Yes, whatever way you want to put it that would be helpful context for us.

Yes.

Yes.

So I think -- I mean, I can kind of break it down into the pieces.

I mean, I think from a -- let me just begin with the energy side, I mean, I think, what we see in the energy side is that the second half will see much better momentum sequentially, particularly the upstream side.

As we called out, we expect that, that's going to be up low to mid-single-digits.

And then the interesting fact on the mid- and down Josh is that typically we get most of the orders in the first half, Q1 and Q2, that's what we called out that order momentum in mid- and down was actually particularly fairly good.

So we expect that order as absolute dollars in the second half for mid and down should be expected to be lower than the first half, but then may be offset by the better momentum in orders on the upstream side.

Okay.

So the absolute dollar run rate may be -- I know it's over generalizing it, but probably similar from 1Q levels rest of the year?

I mean scaling that up obviously, sequentially growing.

Our next question comes from John Walsh of Crédit Suisse.

So I apologize if somebody already asked this, I just hopped on.

But Medical had a very strong performance this quarter, just wondering if you can kind of comment on both what's driving the top line and the better margins than we were looking for; and then really the sustainability of that going forward?

John, thanks for the question.

I mean, I think the Medical segment continues to be one that we are making a lot of organic investments.

It continues to one that we talked about, also our funnel for M&A continues to be fairly healthy.

In terms of the performance, yes, I mean, you can see that the teams continue to execute really well.

It has to do in part, if you recall in 2018, our order momentum was really strong, we're seeing some tough comps, because of that.

Order momentum in 2018 was really strong, because of lot of the new design wins that we achieved in 2018.

We're seeing shipment of that here in 2019 in the first quarter.

But again, the order momentum continues to do well even though orders were you could call like kind of flattish, that was on top of 11% growth from last year, and also, the absolute dollar amount was fairly healthy at $70 million, which allowed us to increase our backlog.

So I'd say, it is really great, good execution from our team on the initiatives of the liquid pumps, liquid handling as we are entering new markets with that and seeing some pretty nice design wins on that.

Great.

And then maybe just a follow-up around working capital, looks like you kind of continue to improve this metric here.

I mean, how should we think about the cadence?

Is there are any noise from channel or tariffs or is this still just kind of clean execution on driving that down as a percent of sales?

I think for us it remains a strategic focus and we'll be able to continue to drive improvement, in particular on the inventory as we move through the year, as we had mentioned, I think at the Investor Day, it is still an area of focus for us, we've been pleased with what we've done with receivables and payables, but we still see upside opportunity as we move through the year on our inventory.

This concludes our question-and-answer session.

I would like to turn the conference back over to Vicente Reynal for any closing remarks.

Thank you, and once again, thanks -- thank you all of you for your level of interest in Gardner Denver.

As we discussed, we've some pretty exciting momentum going on in the company.

Always we emphasize our big thank you to all of our employees for delivering another great quarter here, our performance and the continued momentum that we have in our company of creating a very unique performance-driven culture.

So with that, we'll just call it a close, and we will talk to all of you soon at some point in time.

Thank you.

The conference has now concluded.

Thank you for attending today's presentation.

You may now disconnect.